Why you should not fall for extended loan tenures

Banks are looking to extend the tenure of repayments to make equated monthly instalments (EMIs) affordable as they have no room left to tinker with interest rates, a report in Business Linesays.

The average repayment period for a home loan is 15-20 years and for auto loans 3-5 years.

As per the report, banks are looking to extend tenure for existing home loan customers to 25 years and those for auto loans to six to seven years.

Here's a lowdown on what is in store for those who fall for the offer.

Banks are looking to extend tenure for existing home loan customers to 25 years and those for auto loans to six to seven years.

Is it a smart choice: Let's say you took a loan for Rs 50 lakh for 15 years at 12 percent rate and an EMI of Rs 60,008. If you stick to the loan as per schedule, the total cost of the loan will be Rs 1,08,01,620. Assuming, you have serviced the loan for five years, your loan outstanding will be Rs 4182568.

Case 1: Now if you decide to stick to the loan for another 10 years (the original tenure), the total cost of the remaining loan would be Rs 72,01,080.

Case 2 : If you choose to extend the tenure by another five years, your new EMI will fall to Rs 50,198. But the total cost of the loan for the new tenure would be Rs 90,35,640.

The above example clearly shows that when you increase the tenure, and lower the EMI, your loan becomes more expensive. Do not go for a lower EMI and increased tenure option unless you have absolutely no option left -- a situation where you are on the verge of defaulting.